Foreign Nationals In Gauteng’s Informal Retail Sector

Introduction

The draft Gauteng Township Economic Development Bill, if passed, will restrict the ability of foreign nationals who are not permanent residents to set up informal and even some formal businesses the province’s township areas. This brief focuses on the informal sector, which is extremely important to livelihoods and the economy. Any legislation that might affect it, negatively or otherwise, must be carefully considered.

Importance of the informal sector

The third quarter 2020 StatsSA Quarterly Labour Force Survey[1] found that nationally 3 008 000 people[2] were employed in trade. Of these, 1 007 000 were employed in the informal sector. A 2017 study by UNISA’s Bureau of Market Research estimated that the spaza economy of this subsector alone contributed R 9 billion to the economy per annum.

While provincial estimates of informal employment by subsector are not reported, we do know the total number of people employed in the informal sector in each province. Assuming that in each province the informal traders as a percentage of all informal sector workers is the same as the national percentage, Gauteng has 263 000 people employed as informal traders.

The challenges facing local informal traders

Prior to the arrival of foreign spaza shop owners and not long after the fall of apartheid, something much larger, more established and local began to enter into the township areas: the formal retailers – Shoprite, Pick n’Pay, Spar, etc. In 2010 GG Alcock (CEO of Minanawe Marketing, a specialist informal sector activations business) correctly predicted that this would kill off the incumbent South African owned spaza shops, which would become nothing more than convenience and emergency shops.[3]

South African owned spaza shops at the time were expensive and had little stock, but were closer to their customers than the large retailers (before their arrival). From 2002 onwards, after the large retailers did their damage, foreigners stepped in. They had a low cost of entry and would rent the shop from a South African, who was relieved to receive R2500 to R5000 a month for his/her defunct spaza. It also happened at a time when social grants were growing at a dramatic rate, resulting in a lot more money suddenly entering the lowest income groups.[4]

The new foreign owners provided the spark that the informal retail sector needed in order to compete with the large retailers. A 2016 survey by Minanawe Marketing showed that a basket of branded goods from an informal retailer was on average 7% cheaper, and could save the consumer between R37 to R104 on a basket of goods costing R1 179 at Shoprite in Naledi, Soweto (ref). The savings would increase 5% to 10% for the same basket if transport costs were considered, as the shopper would not have to incur the R20 for the round trip. If a shopper were to shop at only formal purchase points, this could cost 10% of his/her monthly income, and is one of the reasons why in recent years the money spent in informal stores has increases at a rate of 7% per year versus formal stores’ 4%. Therefore, the real losers, thanks to foreign informal traders, are the formal retailers, and the winner is the consumer.[5]

It has also been proved that foreign nationals have been able to out-compete their local counterparts, sometimes causing the latter to shut-down or change their line of business. A study undertaken in 2010 by the Sustainable Livelihoods Foundation[6] found that foreign owned shops were cheaper and better stocked, capturing the market from the existing stores.[7] This resulted in a major shift in ownership of spaza shops to foreign nationals. The significant finding was that the business strategy and scale of operations of foreign-run shops outmanoeuvred the micro-scale ‘survivalist’ approach of South African spaza shops. The important difference was the role of social networks for the foreign shops, which provided for:

• cheap labour
• enforcement of contractual agreements by elders
• strategic investment to establish Somali stronghold areas
• group purchasing to provide economies of scale
• facilitation of micro financing.

South African shopkeepers on the other hand operated within weak social networks, often limited to immediate family members. Unable to compete, the South African run spaza shops either closed or started alternative activities, such as the sale of alcohol or takeaway food.

The long-term solution, however, is not simply to ban the foreign nationals who are not permanent residents from informal trade, but instead equip their local counterparts to become more competitive.

Conclusion

Losers from a Bill, which suppresses competition in the informal sector from foreign nationals, will be township consumers and the winners will mainly be big retailers. This is because as the more economically efficient foreign owned informal retailers are forced to close, the current failure of locally owned informal businesses to compete with the large retailers will force township consumers back to shopping at Pick ‘n Pay, Shoprite, etc. and at their higher prices.

If Gauteng’s Provincial Legislature was clearer about the competition that exists between large retailers and local and foreign informal sector business owners, they would focus on helping locals become more competitive instead of trying to suppress the competition – which will only destroy livelihoods and have negative effects for township consumers.

There are a number of ways that government could help local informal traders become more competitive, and while a number of these mentioned below are included in the Bill, suppressing the competition should not be one of them:

• First, government could regulate the retail grocery trade in the townships in a way that ensures that informal businesses which become large enough to formalise do so. Those large enough to negotiate price discounts and merchandising from producers, to employ staff and to accumulate business assets should start to formalise – whether they are run by foreigners or South Africans. It might mean having to relocate to the high street in compliance with municipal by-laws, registering staff, paying minimum wages, submitting VAT and income tax returns, etc. The smaller more survivalist business could remain less regulated and, given their niche location and lower overheads, could sustain a modest competitive advantage.[8]
• Second, foreign spaza shop owners lay-out more capital – R45 000 compared to R1 500 to R5 000 by South Africans. A FinMark Trust study showed that there is inadequate knowledge among small business owners of the benefit of credit.[9] Access to and knowledge about formal micro credit will help narrow this capital lay out gap.
• Lastly, more business skills training must be provided by government and other bodies suited to do so. This would include the DTI, the Department of Small Business Development, local business chambers, and the Wholesale and Retail Sector Education and Training Authority.[10]

Charles Collocott
Researcher
charles.c@hsf.org.za

[1]Statistics South Africa, Quarterly Labour Force Survey: Q3 2020, Statistical Release P0211, 12November 2020.